The country’s largest state-owned water-delivery project should be removed from the California agency that runs it and placed under another authority as part of a shake-up in how the state’s water system is run, according to a report from a state watchdog agency.

The Little Hoover Commission said the state’s ability to manage limited water supplies is compromised by the way agencies are set up.

The state Department of Water Resources currently handles long-range planning and water conservation programs and runs the State Water Project, which in turn provides most of the agency’s budget — a potential conflict, or at least the appearance of one, according to the commission.

“We think they can run (the water project) much better and more efficiently “… as an independent entity,” said Daniel Hancock, the commission’s chairman and a retired homebuilding industry executive from San Ramon.

Water rights are issued and enforced by a separate agency, the State Water Resources Control Board. And units that specialize in determining how much water should remain in rivers and streams reside with the state board and yet another agency — the Department of Fish and Game.

The commission recommended those responsibilities be brought together under a new Department of Water Management so that one department could determine how much water is needed in streams, how much water can be used by farms and cities, and determine how to balance those uses.

The State Water Project would then be run by a newly created authority, the commission recommended.

The recommendations go to the governor and state Legislature, which could ignore them or act on them.

A representative of contractors who rely on the project said they generally support the idea of pulling the project out of the state agency now running it.

“It is increasingly difficult to run the project efficiently within DWR,” said Laura King Moon, assistant general manager for the State Water Contractors.

However, King Moon said contractors were not convinced of the wisdom of having a board representing statewide interests run the project, as recommended by the commission.

“We need to look at that more carefully,” King Moon said.

The commission also recommended that the newly revived California Water Commission — which has been defunct for years but was reconstituted in preparation for a massive bond measure that has since been delayed to 2012 — be put in charge of spending billions of dollars in natural resource bonds that have already been approved by voters.

Hancock said the idea was modeled on the California Transportation Commission, which lists and prioritizes transportation projects so that transportation funding is spent in a strategic way.

Proceeds from natural resource bonds, by contrast, are spent with far less planning.